Volume I, No. 3 —July 15, 2021
By Ron A. Rhoades, JD, CFP®
Associate Professor of Finance, Gordon Ford College of
Business
Director, Personal Financial Planning Program, Western
Kentucky University
Financial Advisor and Content Specialist, ARGI Investment
Ser
vices, LLC
To contact Ron, please email: bear@argi.net.
A Deeper Dive into the
Discussions Regarding Wage Stagnation,
Income Inequality, and
the Future of Work
Since 1980 (or even before), it is often argued that two main trends have characterized the U.S. labor market – stagnating average earnings and rising earnings inequality. These trends have spurred searches into their primary causes, have raised concerns about their societal consequences, and have led to often-heated debate over the appropriate policy responses, if any. In this edition of Da Bear’s Perspectives, I focus on topics surrounding the job market – wage stagnation, income inequality, the effect on employment of minimum wage increases, and which occupations will see jobs disappear over the next decade – versus which occupations will see severe job shortages.
As with most other editions of Da Bear’s Perspectives, this is a longer read, with more detailed discussion of the issues presented than seen in many of my blog postings. So, for those who dare to peruse the following, enjoy!
Executive Summary
While wages for many workers have remained relatively flat, adjusted for inflation, over the past four decades, some evidence exists that the cost to employers of providing employee benefits (especially health care premiums to the extent paid by employers) have resulted in modest increases in total compensation to employees over the time period.
While it is difficult to isolate all of the factors to discern which are the most important, the most important factors appear to be the rise of the use of automation and information technology (including, more recently, AI), globalization (i.e., the shifting of work away from the United States to lower-cost labor markets), and (as a result, in part) deunionization.
Increases to government-mandated minimum wages, or other employee benefits, often result in a shift to hiring more part-time workers than full-time workers. But, over time, it is likely that companies (due to labor shortages, and realization of the different “costs” of part-time workers) move back to hiring more full-time workers.
There has been a substantial increase over the past four decades in income inequality. In the future, it is possible that the “middle class” will be somewhat phased out, replaced by a high-earning top 20% of Americans and 80% earning far less.
Over the next decade, many lower-skilled jobs will be replaced via automation. Yet, a shortage of highly skilled jobs will continue to grow, especially for those working in information technology, health professions, engineers, K-12 teachers, and managerial and certain other business roles. Both employers and employees should consider policies to address these future trends.
Contents
How Have Wages and Compensation
Trended Over the Past Four Decades?
Why Has Wage Growth Stagnated?
What is the Effect of Raising the
Minimum Wage?
What Will U.S. Labor Markets Look
Like in the Future?
American’s paychecks have barely kept up with inflation, on average, over the past 40 or so years. As related in a 2018 report: “After adjusting for inflation, however, today’s average hourly wage has just about the same purchasing power it did in 1978, following a long slide in the 1980s and early 1990s and bumpy, inconsistent growth since then.”[1] The same report, however, notes that “wage gains have gone largely to the highest earners. Since 2000, usual weekly wages have risen 3% (in real terms) among workers in the lowest tenth of the earnings distribution and 4.3% among the lowest quarter. But among people in the top tenth of the distribution, real wages have risen a cumulative 15.7%, to $2,112 a week – nearly five times the usual weekly earnings of the bottom tenth ($426).”[2]
While wages account for about 70% of employee compensation, per the Bureau of Labor Statistics (BLS), other employee benefits exist (for full-time employees, traditionally) that contribute to total compensation, such as employer-paid portions of group health insurance, employer-provided contributions to retirement accounts, tuition and educational reimbursements and other benefits. As stated in a 2018 report from Pew Research Center, “One theory is that rising benefit costs – particularly employer-provided health insurance – may be constraining employers’ ability or willingness to raise cash wages. According to BLS-generated compensation cost indices, total benefit costs for all civilian workers have risen an inflation-adjusted 22.5% since 2001 (when the data series began), versus 5.3% for wage and salary costs.”[3]
Why Has Wage Growth Stagnated?
The growth of wages in the United States, for many occupations, has been relatively stagnant for the past four decades. The question is … why?
Market Power / Deunionization. One of the explanations for the decline in wages is the deunionization that has occurred in the United States over the past four decades. As stated in a recent analysis by the Economic Policy Institute, “A major factor depressing wage growth for middle earners and driving the growth of wage inequality over the last four decades has been the erosion of collective bargaining.”[4] As noted in another recent academic paper, “The share of workers covered by a collective bargaining agreement fell from 27.0% in 1979 to just 11.6% in 2019.”[5] A 2018 paper argues that the “size of the union effect is substantial, especially for men” and estimates that “weekly wages would be approximately $61—or 6 percent—higher for nonunion private sector men if private sector union densities were as high in 2015 as they were in 1977. Over the course of a year, this would result in a wage gain of $3,172.”[6]
The Effect of Automation. One recent study suggests that automation had, by far, the largest negative impact, stating that “between 50% and 70% of changes in the US wage structure over the last four decades are accounted for by the relative wage declines of worker groups specialized in routine tasks in industries experiencing rapid automation.”[7]
Automation can occur via the increased use of computers (and similar devices), or through physical machines. As explained in a recent paper by Robert D. Atkinson, “Automation is a particular kind of process technology. The term was originally coined in 1945 when the engineering division of Ford Motor Company used it to describe the operations of its new transfer machines that mechanically unloaded stamping from the body presses and positioned them in front of machine tools. Today, it refers to any production process that is controlled by a machine, with little or no input from an operator, in order to produce in a highly automatic way. There are many technologies that can enable a production process to be automated, but robotics is an increasingly important one. While there is no hard-and-fast definition of a ‘robot,’ the term generally refers to physical machines that can be programmed to perform a variety of different tasks, with some level of interaction with the environment and limited or no input from an operator.”[8]
Automation requires capital, and this in turn may affect wages. As explained in a 2014 paper, “The distribution of corporate income between profits and compensation had been stable for decades, but, beginning around 1980, U.S. firms shifted corporate income away from labor and toward capital, decreasing labor’s share.”[9]
Offshoring. Another factor likely affecting wage growth, and perhaps a major factor itself in deunionization, is the international offshoring of American jobs over time. As explained in a 2018 IMF working paper, “A growing literature studies the implications of international offshoring, whereby firms perform specific subcomponents or tasks of their production processes overseas (see, for example, Grossman and Rosii-Hansberg (2008), Blinder (2007), Jensen and Kletzer (2010), Blinder and Krueger (2013), and Firpo, Fortin, and Lemieux (2011)). The result could be that the demand for domestic labor and hence wages fall.”[10]
A Shift Toward Part-Time Employment? Total compensation paid can be affected by an increase in the number of part-time workers (often not eligible for many employee benefits, such as group health insurance and/or employer retirement plan contributions). As observed by a 2008 study in Europe, “the substantial increase of part-time employment over past decades was also stimulated by the growing labor market supply of women and the expansion of tertiary activities which rely particularly on flexible working hours (e.g. retail, gastronomy, health care, domestic workers) … [we also find that] marginal part-time employment is increasingly used for a wide range of activities, including high-skilled tasks.”[11]
More Recent) Declines in Productivity Growth. A lack of productivity growth could explain the fall in wages, according to economist Jay Shambaugh. “Growth in productivity, which is the output we get from every hour of work, has been declining in the US, as well as across advanced economies globally. Labor productivity grew at an average of 2.1% from 1987 to 2004, when it began falling, according to one McKinsey report. But since 2011, labor productivity growth has fallen to an average of 0.7%. Still, wages haven't followed productivity gains in the longer run, according to the Economic Policy Institute. Productivity is up 243% since 1948, but wages are only 109% higher.”[12]
Other Explanations Exist, But Are Debated. For example, Lawrence Mishel postulated in 2015 that wage stagnation “is the result of intentional policy choices made on behalf of those with the most income, wealth, and political power. As explained below, these choices fall into five broad categories: the abandonment of full employment as a main objective of economic policymaking, declining union density, various labor market policies and business practices, policies that have allowed CEOs and finance executives to capture ever larger shares of economic growth, and globalization policies.
Collectively, these policy decisions have shifted economic power away from low-
and middle-wage workers and toward corporate owners and managers. ”[13]
Other explanations include lagging educational attainment in the United States
versus other countries, the rise of noncompete clauses, broad employment
declines in manufacturing and production sectors and a shift toward lower-wage
industries,[14]
and rent-seeking activities.
In summary, is difficult to isolate the causes of wage
stagnation, with multiple factors at play. It is likely that automation is a
significant cause, along with globabilization. Together these, in turn, affect
the trend of deunionization. But other factors are likely also involved.
What is the Effect of Raising the Minimum Wage?
While many argue that raising the minimum wage results in
lower employment, the actual data is far more nuanced.
For example, in a recent study of a chain of fashion retail
stores subjected to higher minimum wages, the authors found that “a $1 increase
in the minimum wage, while having a negligible impact on the total labor hours
used by the stores, leads to a 27.7% increase in the number of workers
scheduled per week, but a 20.8% reduction in weekly hours per worker … Such
scheduling adjustment not only reduces the total wage compensation per worker
but also reduces workers' eligibility for benefits.”[15]
More part-time work may initially result due to
increases in a minimum wage (or increases in the costs of benefits, such as
requirements for full-time workers in larger companies to be covered for group
health insurance, under the Affordable Care Act.[16]
Yet, a major factor driving the number of full-time workers vs. part-time
workers is the availability of labor (with more labor available during
recessions, as an example.)[17]
It can be postulated that, over time, corporate policies often change (due to
labor shortages, at times[18])
and the lowering of weekly hours per worker seen after increases in the minimum
wage is then corrected over time as more full-time workers are hired. Employers
may see cost reductions available through hiring more part-time workers (who
are often not paid benefits), but then employers may thereafter increasingly wrestle
with the difficulties of managing part-time workers (such as higher turnover
among part-time workers,[19]
lack of participation by part-time workers in team projects, resentment by
full-time workers in the company, and less familiarity among part-time workers
in company policies – which can lead to inconsistent work quality[20]
The Rise of Income Inequality
As indicated previously, about four decades ago U.S.
companies shifted corporate income, with more of the corporate revenues being
utilized to increase capital investments (computer information technology,
robotics, etc.). This led to a decrease in labor’s share of corporate income,
which in turn has contributed to widening income gaps.
As seen in the chart above, a declining share of labor income (whether measured by wages, or total compensation) has occurred since 1980, with labor’s share declining from 65.4% in 1947 to 56.7% by 2016. And much of that decline has actually occurred over the past twenty years.[21]
Again, there are likely numerous reasons for this long-term
trend. One is that as technology has improved and has become less costly, firms
move to deploy more information technology solutions and automation, thereby
substituting capital investment for labor.
Declining unionization, globalization, lower marginal federal income tax rates on higher-income Americans, the rise of the amount of the federal estate tax exemption, and even the financialization of the U.S. economy are all mentioned as contributing factors.
Analyzing by share of household income, by income tier,
reveals an even starker contrast in the rise of income for upper-income
households, relative to middle-income and lower-income households, as the chart
at right from Pew Research Center indicates.
Such variances in income can also lead to, and can be caused
by, changes in the distribution of wealth. The Federal Reserve provides data on
household wealth for different groups, including broken down by wealth
percentile. The following chart highlights household wealth by wealth
percentile over the past two decades:
Not all studies indicate such a dramatic increase in wealth inequality. The conservative-learning Cato Institute concluded that “wealth inequality has increased modestly but mainly because of general economic growth and entrepreneurs creating innovations that are broadly beneficial.”[22] Other studies note that transfer payments such as child tax credits, as well as government entitlement programs such as Medicare, Medicaid, and Social Security, are often not included in estimates of income inequality.
What Will U.S. Labor Markets Look Like in the
Future?
More Automation; Less Jobs in Certain Occupations.
The impact of automation on the labor force should not be underestimated. As
explained by Robert Atkinson, “To date, most robot adoption has occurred in
manufacturing, where there are robots designed to perform a wide variety of
manual tasks more efficiently and consistently than humans. But with continued
innovation, robot use is spreading to many other sectors too, from agriculture
to logistics to hospitality. Robots are getting cheaper, more flexible, and
autonomous, in part by incorporating artificial intelligence.”[23]
South Korea leads in the deployment of robots, followed by
Singapore, Germany, Japan, Sweden, and Denmark. The United States ranks seventh
(as of 2017), with only two-thirds of the number of robots per 10,000
manufacturing workers when compared to Germany and Japan, and with less than
one-third of the number of robots per 10,000 manufacturing workers when compared
to high-flying South Korea and Singapore.[24]
Artificial Intelligence (AI), machine learning, and other
technologies continue to rapidly transform the workplace. and the continued
development of software programs able to handle tasks. While history informs us
that jobs that are destroyed by mechanization or other technological changes
are replaced by new jobs, history provides only a guide but not a certainty
when predicting the future. Large differences exist in projections of the
percentage of jobs that will be lost in future decades due to automation, AI,
etc.
Certain jobs will likely decline due to automation, but the
percentage of jobs is not likely to run as high as 47%, a commonly cited
figure. A recent McKinsey report estimates 27% of jobs will be displaced by
automation. But many workers in those jobs are made more efficient, with
machines performing an increasing share of rote tasks. As a result, McKinsey
estimates that only about 15 million Americans will need to find a new line of
work – only 9% of American workers.[25]
Lastly, the benefits of automation will likely flow to
highly compensated, highly skilled workers, and to the owners of capital. As
many more highly skilled workers are needed in the future than will likely be
produced by our education system (see discussion, below), these workers’
incomes will likely be driven higher. As a result, income inequality could
exacerbate over the next decade or longer.
What Types of Jobs Will Be Lost in the Future? Recent
deployments of technology provide a partial clue, as set forth in a February
2021 report from McKinsey:
Our
research suggests that faster adoption of automation, AI, and digital
technologies is likely to be concentrated in specific use cases, reflecting
company priorities related to COVID‑19.
One example seen anecdotally during the pandemic was deployment of technologies
to cope with surges in demand. This included automation in warehouses and
logistics that enabled companies to cope with higher volumes of e-commerce, or
in manufacturing plants to ramp up production of items that saw demand spikes,
such as food and beverage, consumer electronics, and masks and other personal
protective equipment. Secondly, many companies used technology to reduce
workplace density. For instance, meatpacking and poultry plants, which fall
into the indoor production and warehousing arena, accelerated deployment of
robotics. Service robots have also been enlisted to deliver supplies in
hospitals and room service orders in hotels. Companies deployed more self-checkout
in grocery stores and pharmacies to meet customer demand for contactless
service. Demand for apps for ordering in restaurants and hotels similarly
surged. Finally, companies have shown more interest in using robotic process
automation to handle paperwork and reduce density in office spaces.
New developments in automation will lead to job losses in many areas of unskilled labor. For example, automation is being deployed to pick fruits and vegetables[26] and to remove rocks from farmland.[27] Jobs will also likely be lost in customer sales, food service, and last-mile delivery functions.[28] Robotics will continue to change the nature of distribution center / warehouse jobs, and likely lead to some job losses over time.[29] While it may take many years to unfold, autonomous (self-driving) trucks[30] and cars[31] may displace many taxi and delivery drivers.
The Likely Shortage of Skilled Labor. Due to the
evolution of technology, the aging of America (and the need to care for older
Americans), and low birthrates leading to a decline in the number of likely
college graduates by 2030, there will likely be shortages of skilled labor in
the future.
· One study conducted by researchers at the Cleveland Clinic Lerner College of Medicine and elsewhere projected a shortage of 510,394 registered nurses nationwide by 2030.[32]
· The State of California projected a shortage of jobs by 2030 primarily in computer and mathematical occupations, health care practitioners, business and financial operations, and architecture and engineering.[33]
· A recent analysis by the Boston Consulting Group indicated that “the professions with the biggest looming shortfalls are computer-related occupations and jobs in science, technology, engineering, and math.”[34] The following chart from BCG’s report is telling:
· Another research study concludes that “over the
next decade, employers in nearly every state will face significant shortages
both of workers with an associate degree or some college (nearly 800,000
workers) and of workers with a bachelor’s degree or higher (over 8.5 million
workers) ….”[35]
In Conclusion
Recent gains in wages may assist lower-income workers in
particular – at least temporarily. However, inflation may serve to erase some
of the benefits of recent wage increases.
More importantly, in the future many low-income jobs will
disappear. There is a great need for more Americans to acquire the education
(including all-important interpersonal and leadership and critical thinking
skills) and work experience, in order to meet the demand for skilled labor as
the next decade progresses. Forward-looking employers will seek to foster the
pursuit of education and skills by their employees.
Both income inequality and wealth inequality are likely to
continue – and may even become more severe. The “middle class” – which has
diminished due in large part to the loss of manufacturing jobs over the past
four decades – may likely diminish in numbers further.
This paper did not seek to discuss the potential societal
and other problems which might be caused by income and/or wealth inequality,
nor did this paper explore possible policy fixes to these problems. There are
many disagreements among economists, and policymakers, on the extent to which
income inequality and wealth inequality are problems, and on whether to deploy
policy fixes.
Demographic trends in the United States will exacerbate
labor shortages in 2030 and beyond. Loosening up immigration policies for
skilled workers will likely be a partial fix, although skilled labor shortages
will exist in most developed countries by 2030.
Many jobs may exist in 2030 that are not even known today.
Employees should assess their skill sets and knowledge and experience levels.
Many workers today should pursue additional education to keep up with the rapid
pace of technological changes affecting many job functions, as well as opening
up new opportunities for their own career advancement – especially given the
higher wages likely to be seen for certain highly skilled jobs.
Until the next time …
Very
truly yours,
Ron (Da
Bear)
Email: bear@argi.net
[1] Drew Desilver, For most U.S. workers, real wages have
barely budged in decades, Pew Research Center (August 7, 2018).
[2] Id.
[3] Id.
[4] Lawrence Mishel, The enormous impact of eroded
collective bargaining on wages, Economic Policy Institute report (April 8, 2021).
[5] Hirsch, Barry T., and David A. Macpherson. 2020. Union
Membership and Coverage Database from the CPS. unionstats.com, data compiled
from the Current Population Survey February 24, 2020.
[6] Denice, Patrick, and Jake Rosenfeld. 2018. “Unions and
Nonunion Pay in the United States, 1977–2015.” Sociological Science 5: 541–561.
[7] Daron Acemoglu and Pascual Restrepo, Tasks,
Automation, and the Rise in US Wage Inequality, NBER Working Paper No. 28920
(June 2021) [“We show that close to 50% of the variation in labor shares (and
measured task displacement) across industries is driven by automation
technologies, including the adoption of industrial robots, specialized
machinery and software. In line with this result, we find a very similar
negative relationship between wage changes and task displacement.”]
[8] Robert D. Atkinson, Robots and
International Economic Development, Information Technology & Innovation
Foundation report (Jan. 2021).
[9] Wind, Serge L., Labor's Declining Share of Corporate
Income: Impact on Income Inequality and the U.S. Job Recovery (May 21, 2014).
[10] Yasser Abdih and Stephan Danninger, Understanding U.S.
Wage Dynamics, IMF Working Paper/18/137 (June 2018).
[11] Jacobi, Lena and Schaffner, Sandra, Does Marginal
Employment Substitute Regular Employment? - A Heterogeneous Dynamic Labor
Demand Approach for Germany (July 1, 2008). Ruhr Economic Paper No. 56.
[12] Rachel Premack, 7 reasons why your salary might not be
going up, even though the economy is doing great, Business Insider
(Sept. 24, 2018).
[13] Lawrence Mishel, Causes of Wage Stagnation, Economic
Policy Institute (January 6, 2015).
[14] Drew Desilver, For most U.S. workers, real wages have
barely budged in decades, Pew Research Center (August 7, 2018).
[15] Yu, Qiuping and Mankad, Shawn and Shunko, Masha,
Evidence of The Unintended Labor Scheduling Implications of The Minimum Wage
(June 10, 2021).
[16] See, e.g., Dillender, Marcus and Heinrich,
Carolyn and Houseman, Susan N., Effects of the Affordable Care Act on Part-Time
Employment: Early Evidence (June 15, 2016). [“We estimate that the ACA resulted
in an increase in low-hours, involuntary part-time employment of a half-million
to a million workers in retail, accommodations, and food services, the sectors
in which employers are most likely to reduce hours if they choose to circumvent
the mandate, and also the sectors in which low-wage workers are most likely to
be affected.”
[17] See, e.g., Jill Mislinski, Full-time and
Part-time Employment: A Deeper Look, Advisor Perspectives (July 7, 2021).
[18] See, e.g., Nick Bunker, Mort Part-Time Workers
Are Getting Full-Time Work, Indeed (Oct. 18, 2018) (observing, as unemployment rates had gone
done, that “[t]he rate at which involuntary part-timers have moved to full-time
status has been rising as the labor market has tightened. The strong labor
market is providing more full-time opportunities for workers and it appears it
will continue to do so. Workers moving from involuntary part-time to full-time
status are not primarily doing so by switching jobs. About 94% of these workers
are moving to full time by finding additional hours with their current
employers. In fact, among this group, the rate of moving to new full-time jobs
hasn’t increased over the current expansion.”)
[19] Saravanan Kesavan and Camelia M. Kuhnen, Demand fluctuations,
precarious incomes, and employee turnover (May 2017).
[20] See, e.g., Filling the gaps: Pros and cons of
hiring part-time employees, Insperity (retrieved July 15, 2021).
[21] Source: James Manyika et. al., A new look at the
declining labor share of income in the United States, McKensey Global Institute
(May 2019).
[22] Chris Edwards and Ryan Bourne, Exploring Wealth
Inequality, Cato Institute Policy Analysis No. 881 (Nov. 5, 2019).
[23] Robert D. Atkinson, Robots and International Economic
Development, Information Technology & Innovation Foundation report (Jan.
2021).
[24] Robert D. Atkinson, Robots and International Economic
Development, Information Technology & Innovation Foundation report (Jan.
2021).
[25] The future of work after COVID-19, McKinsey Global Institute
(Feb. 2021).
[26] See, e.g., Warwick Long and Nikolai Beilharz,
'Clive' the fruit-picking robot gets to work in Goulburn Valley to cover
seasonal worker gap, ABC News (Nov. 27, 2020)
[27] See, e.g., Akash Pasricha, Smartsheet
co-founder’s latest venture tackles ‘the worst job on the farm,’ The Seattle
Times (June 30, 2021).
[28] The future of work after COVID-19, McKinsey Global
Institute (Feb. 2021).
[29] “Will Robots Replace Warehouse Workers?”, Clarus WMS
(Jan. 12, 2021).
[30] In January 2021, the U.S. Department of
Transportation, in partnership with the Department of Labor, Department of
Commerce and the Department of Health and Human Services, released a report to
Congress titled “Driving Automation Systems in Long-Haul Trucking and Bus
Transit: Preliminary Analysis of Potential Workforce Impacts.”
[31] Adam Hayes, The Unintended Consequences of
Self-Driving Cars, Investopedia (May 15, 2021).
[32] Jon Marcus, How a decline in community college
students is a big problem for the economy, The Washington Post (March 5,
2021).
[33] Making Room for Success: Addressing Capacity
Shortfalls at California’s Universities, College Futures Foundation (October
2019).
[34] Digital Technology Will Eliminate Millions of Jobs But
Create New Opportunities, Boston Consulting Group press release (March 18,
2021).
[35] Douglas Holtz-Eakin, Tom Lee, Projecting Future Skill
Shortages Through 2029, American Action Forum (July 18, 2019).
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